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Don't Get Squashed by Carbon Footprints

Pretty soon it may matter how carbon-friendly your investments are.

The world is changing. Well, at least the U.S. is, slowly, when it comes to dealing with carbon footprints. We're starting to pay attention to which companies and activities release substantial greenhouse gases, and laws are being passed to restrict companies in that area. "Cap-and-trade" laws are favored by many, whereby companies have an emission limit, but can buy or sell rights that they do or don't need, essentially creating a market in emission rights. This will be a boost to those companies with low emissions and rights to sell, and will be a new expense for companies that need to buy rights or invest in gas-reduction technology.

Accordingly, we investors should start thinking about which companies have an edge in this area. And here to help us are the folks at Trucost, who are measuring the environmental presence of thousands of companies. They recently studied 75 of America's biggest ETFs and mutual funds along with 16 top socially responsible funds to measure their carbon footprints.

Topping the list was the iShares FTSE/Xinhua China 25 Index Fund, whose holdings include a number of Chinese coal-fired utilities. At the bottom was the Financial Select Sector SPDR Fund, with top holdings such as JPMorgan Chase(NYSE:JPM) and Wells Fargo(NYSE:WFC). Clearly, industries matter, with financial and health-care companies scoring generally well, and utilities and energy enterprises scoring more poorly. But even among energy-intensive industries, some stocks score better than others based on carbon footprints.

A new indexAnother guide for us investors is the new S&P U.S. Carbon Efficient Index, which starts with the S&P 500 constituent companies and removes many of its highest-carbon-footprint members, making sure to not reduce the representation by any industry sector by more than 50%. Here's a sample from more than 300 companies that make up the index:

Marathon Oil(NYSE:MRO)

Qualcomm(NASDAQ:QCOM)

Merck(NYSE:MRK)

Halliburton(NYSE:HAL)

Best Buy(NYSE:BBY)

Through 2008, the average carbon footprint of companies within the new index is about half that of the S&P 500.

Learn more, find moreIf legislation implementing cap-and-trade passes, then smaller carbon footprints will translate into less overhead for companies that don't have to obtain extra carbon credits. Conversely, profits on companies with big carbon footprints could suffer. That's a trend that could fuel more interest in socially responsible investing overall.

Get some promising ideas from these articles, both in low-carbon industries and others:

If you're concerned about not only the environment, but about other social issues, you might want to look into socially responsible mutual funds. Our market-beatingMotley Fool Champion Funds newsletterincludes analysis of SRI funds -- try it for free and see all its picks.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian